The passing of the Tax Cuts and Jobs Act (TCJA) in December 2017 brought about some of the largest changes for exempt organizations since the reformatting of the Form 990 tax return in 2008. This is shown by some organizations now having unrelated business income tax liability that never did in the past. The list below points out items that could have the highest impact on healthcare tax-exempt organizations:
Tax Rate Change
The new tax rate for 2018 has changed to a flat rate of 21%, compared to the previous tax rate schedule ranging from 15% to 38%. Fiscal year filers will need to figure and apportion their tax based on a blended rate of number of days occurring in 2017 versus 2018.
Executive Compensation Excise Tax
Effective for tax years beginning after December 31, 2017, an excise tax of 21% will be imposed on paid compensation in excess of $1 million to a covered employee or an excess parachute payment (severance) paid to a covered employee.
The definition of covered employee was modified to any employee (including any former employee) of an applicable tax-exempt organization if the employee:
- is one of the five highest compensated employees of the organization for the taxable year
- was a covered employee of the organization (or any predecessor) for any preceding taxable year beginning after December 31, 2016.
Unrelated Business Income (UBI)
Effective for tax years beginning after December 31, 2017, UBI activities will no longer be bundled together in computing the tax liability for an organization. Income and losses from UBI activities need to be separately tracked, and losses from one activity may not offset the income of another activity. The 2018 Form 990-T will still display the aggregate amounts on page 1, but the separate activities’ income and losses will show on Schedule M.
Fringe Benefit Additions to UBI
Tax-exempt organizations providing certain fringe benefits will now need to include the disallowed deductions as additions to their UBI. These additions are any payments made or incurred after December 31, 2017, for the following:
- Any qualified transportation fringe benefit
- Any parking facility used in connection with qualified parking
- Any on-premises athletic facility
These additions will not be included as UBI if they are treated as taxable to employees or if they are already attributable to an unrelated business activity. Please note that fiscal year filers will need to account for these additions in their UBI for any payments made in 2018 that fall within their fiscal year on their 2017 tax return.
Alternative Minimum Tax (AMT)
The 20% AMT has been repealed for tax years beginning after December 31, 2017. Taxpayers may treat a portion of their prior year AMT credit carryover as refundable.
Net Operating Loss (NOL) Deduction
For tax years beginning after December 31, 2017, NOLs from one unrelated business activity cannot offset income derived from another unrelated business activity. The NOL deduction will also be limited to 80% of an activity’s taxable income. This change may cause an organization that has been offsetting taxable income with prior year NOLs to now pay tax liability. However, any existing NOL stemming from a tax year prior to 2018 will be allowed to offset any activity’s income.
Organizations will no longer have the option to carry back NOLs occurring in the current year to the two previous tax years. However, the 20 year carry forward limit has been eliminated. Taxpayers may now apply NOLs to any subsequent year indefinitely.
Tax season is just around the corner. If you have questions about how your organization’s 2018 taxes are affected by tax reform, please contact us.